MARC has assigned an insurer financial strength rating of AA- on Malaysia’s national rating scale to Luxembourg-based Atlanticlux Lebensversicherung S.A. (ATL). The primary driver for the rating is ATL’s focus on writing relatively low-risk unit-linked life policies and the life insurer’s low retention of mortality risks and guarantee risk on unit-linked business with guarantees. ATL saw an increase in its sales volume in 2012 after experiencing three consecutive years of declining premium income, which has positively affected its operating performance and profitability measures. Moderating rating considerations include ATL’s relatively small market share of unit-linked business in its key markets in Europe and high reliance on the independent distribution channel, lack of product diversification and challenging investment environment. The outlook on the rating is stable.

ATL is 74.9% owned by privately-held Munich-based financial services group FWU Group; the remaining 25.1% is held by German insurance group VHV Holdings. ATL’s main business is on underwriting unit-linked insurance policies in its key markets of Germany, Austria, France and Italy. Its business model is characterised by low investment and mortality risks attributed to the low investment risk of unit-linked insurance policies and high reinsurance protection for mortality risks. ATL’s unit-linked business is predominantly policies with no guaranteed returns (83% of total investable assets) in which the investment risk is borne solely by policyholders. The investment risk of the remaining unit-linked business that carries soft guarantee were reduced by investing exclusively on highly rated bonds. MARC views ATL’s conservative investment strategy which favours high-grade bonds and no equity investment as appropriate for its guaranteed business, noting that regulatory guarantee rates for some products have been reduced in light of the low interest rate environment. Investment risk associated with peak value guarantees is transferred to external parties. ATL cedes a substantial portion of its mortality risk to large and well-established reinsurers with high security ratings. ATL’s strategy of retaining 10% to 20% of the remaining mortality risk exposure and imposing limits of EUR5,000 per policy ensures that adverse changes in mortality do not materially impact profitability.

MARC notes significant strategic and operational linkages between ATL and related entities within the FWU Group, in particular asset management company Premium Select Lux S.A. (PSL) and commission factoring company FWU Provisions-Factoring GmbH (FWU PF). PSL manages ATL's investment funds while FWU PF supports the financing on the up-front commission provided by ATL to its distributors. ATL also relies on FWU AG know-how and expertise in developing its insurance product, noticeably the Shari’ah compliance product introduced in Germany in 2012. MARC believes that the aforementioned strategic and operational linkages create ongoing reputation and performance dependencies among group entities with broad credit implications for ATL.

Notwithstanding the subdued life insurance industry sales in Europe overall, ATL managed to grow its new business premium by 25% to EUR15 million in 2012 (2011: EUR12 million). The growth was attributed to a 47% increase in gross premium income in Italy on the back of the increase in the number of distributors and the growth opportunity in the market. Meanwhile, the growth in gross premiums in Germany and France slowed during the same period. Overall, gross written premium grew 11.8% to EUR129 million for the financial year 2012 (2011: EUR115 million). The combined markets of Germany/Austria were ATL’s largest markets at 40% of the total gross written premium (GWP) in 2012 (2011: 44%) while Italy’s share of GWP improved to 23% in 2012 (2011: 17%).

ATL’s reported profitability has been fairly stable owing to its low retention of mortality and investment risks. Historically, ATL’s pre-tax profits have largely held up during periods when investment performance and claims experience have been volatile. Return on assets (ROA) and return on equity (ROE) improved to 1.7% and 14.2% respectively in 2012 from 1.5% and 12.0% in 2011 as net profits increased to EUR2.5 million in 2012 (2011: EUR1.9 million). However, earnings growth would be sensitive to the trend of new business volumes, which in turn depends on ATL’s ability to maintain its competitiveness as a niche producer.

ATL is adequately capitalised with solvency ratio that ranges between 160% and 190% over the last 5 years, above the regulatory requirement of 100%. MARC views that implementation of the risk-sensitive Solvency II regime is not expected to introduce significant regulatory risk for the life insurer in terms of solvency capital requirements given ATL’s low product risk and modest retention of mortality risk.

The stable outlook on the rating assumes sustained underlying profitability and the maintenance of ATL’s comfortable solvency position while acknowledging the uncertainties around the economic environment in its key markets.

Contacts:
Oo Chin Kai, +603-2082 2260/ chinkai@marc.com.my;
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.